BANKRUPTCY'S EFFECT UPON JUDGMENT LIENS AGAINST PROPERTY: A MULTI-STATE ANALYSIS

Bankruptcy proceedings have commenced against Jane Debtor. Ms. Debtor holds title to real property encumbered by one or more judgment liens. What effect will discharge of the debt through bankruptcy proceedings have on the judgment lien?

Illinois

In Illinois, when a judgment lien is perfected-enforceable and on record before third parties-prior to commencement of bankruptcy proceedings, the personal obligation to pay may be discharged in bankruptcy. However the discharge, which releases only the personal obligation to pay the debt, does not automatically remove the lien from the property. Rochelle State Bank v Gavic, 70 Ill App 3d 42, 388 NE2d 436, 26 Ill Dec 721 (2d D 1979); 11 USCS § 524. If the judgment is not specifically listed on the debtor's petition for bankruptcy or the debtor fails to seek a release of the judgment whereby the creditor relinquishes its right of enforcement, the judgment continues to exist after bankruptcy and is enforceable for up to twenty years after the date the judgment was entered. Id.; First Natl Bank in Toledo v Adkins, 272 Ill App 3d 111, 650 NE2d 277, 208 Ill Dec 820 (4th D 1995); 735 ILCS 13-218.

For a lien to be properly perfected, Illinois requires the recording of a memorandum or certified copy of the lien in the county recorder's office. 735 ILCS 5/12-101. Once bankruptcy proceedings conclude, a judgment creditor may foreclose on the property and use sale proceeds to satisfy the debt. However, no deficiency awards may be realized during foreclosure. On the other hand, if discharge of the debt and dismissal of the bankruptcy case occur before the debtor takes title to property, the debt is eliminated and no lien may attach to the new property. 11 USCS § 524(a)(3).

Some liens may also be avoided. Pursuant to Section 545 of the Bankruptcy Code, the bankruptcy trustee may avoid the fixing and attachment of certain liens created by statute such as mechanics' liens, tax liens, judgment liens, etc., where the lien first became effective against the debtor:

 

  1. When a bankruptcy case against the debtor has been commenced;
  2. When an insolvency proceeding, other than bankruptcy, was commenced;
  3. When a custodian was appointed or took possession;
  4. When the debtor became insolvent;
  5. When the debtor's condition fails to meet a specified standard; or
  6. At the time of an execution against the property of the debtor levied at the instance of an entity other than the holder of such statutory lien.

Section 545 of the Bankruptcy Code also allows liens to be avoided when they are not perfected or enforceable against a bona fide purchaser at the time of the commencement of the case, whether or not there is a purchaser at the time. These avoidance rules also apply to a mechanic's lien claim that relates back to the date of contract with the owner-debtor. Statutory liens may be waived from a title commitment or policy when the trustee has petitioned for removal pursuant to Section 545, and the court, after notice and hearing, has approved trustee's petition. Liens arising by agreement however, such as mortgage liens, may not be avoided.

Section 522(f) of the Bankruptcy Code allows debtors to avoid judgment liens for certain property. The statute permits a debtor to move for and obtain a specific order avoiding the lien for certain property because it impairs an exemption to which the debtor otherwise would be entitled. Typically, these requests are made to avoid liens on homestead property. Section 522(d) lists several exemptions that a debtor may be entitled to, however Section 522(b) allows states to opt out of the federal exemptions and specify under state law the property that can be exempted. Illinois has chosen to opt out of the federal list. 735 ILCS 5/12-1201. For exemptions allowed in Illinois, see generally 735 ILCS 5/12-112; 5/12-901; and 5/12-1001.

Indiana

Indiana treats the discharge of judgment liens essentially the same as Illinois. A judgment lien on real estate in Indiana is not properly perfected until a memorandum or certified copy of the judgment has been recorded in the judgment docket book of the county court. IC 33-10.5-7-9; and 34-55-9-2. If the lien was created before the commencement of the bankruptcy proceedings and there has been no successful effort by the debtor to dissolve or avoid the lien, the mere discharge of the underlying debt will not protect the debtor from enforcement of the lien by the creditor. Ruth v First Federal Savings and Loan Assoc of LaPorte Cy, 492 NE2d 1105 (Ind Ct App 1986). Any rent, proceeds, or profits of or from the property, for example resulting from a tax sale of the real estate, remain subject to the claim of the judgment creditor. Brewer v EMC Mortgage Corp, 743 NE2d 322 (Ind Ct App 2001). The discharge of debt will prevent the judgment lien from attaching to property acquired by the debtor after receiving the discharge. 11 USCS § 524; In re Cassi, 24 BR 61 (Bankr ND Ind 1982). Indiana also has chosen to opt out of the federal list of exemptions. IC 34-55-10-1. For the list of Indiana exemptions, see IC 34-55-10-2.

Wisconsin

Wisconsin also recognizes that solely a discharge of a debt during bankruptcy proceedings will not remove the lien from real property. If the creditor takes action to enforce the judgment lien before a satisfaction order has been entered, the debtor's property possessed at the time of the bankruptcy proceedings can be a target for the lien. Stone Central Credit Union v Bigus, 101 Wis 2d 237, 304 NW2d 148 (Wis App Ct 1981). A judgment in Wisconsin is not a properly perfected lien on real estate until a memorandum or certified copy of the judgment has been docketed in the judgment and lien docket by the clerk of the circuit court. Wis Stat §§ 806.10 and 806.15. Under Section 806.19 of the Wisconsin Statutes, a judgment debtor whose debt was discharged in a bankruptcy proceeding may take steps to remove the judgment as a lien on real property. Any person who has received a discharge of a judgment debt in bankruptcy and any person interested in the real property affected by such a judgment may submit an application for an order of satisfaction of judgments pursuant to the procedures outlined in Section 806.19. Once this application is completed and signed by the circuit judge, the judgment ceases to be a lien on any real property, exempt or non-exempt, that the debtor owns at the time or later acquires. Wis Stat §§ 806.19 and 806.21; In re Spore, 105 BR 476 (Bankr WD Wis 1989).

Conclusion

It is a common misconception that discharge of a debt through bankruptcy proceedings will eliminate the judgment lien as well. This is not the case. If the debtor does not take additional action - more than simply listing the debt on the bankruptcy petition - to avoid, settle or satisfy the lien, it is still enforceable by the creditor. The Bankruptcy Code does protect the debtor by prohibiting attachment of a judgment lien from a discharged debt on property that the debtor acquired after the bankruptcy proceeding.

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